NAFCU Compliance Blog

Transportation Bill Modifies Annual Privacy Notice Requirement for Credit Unions; Programming Note and Happy New Year from NAFCU Blog!

Written by Shereefat Balogun, Regulatory Compliance Counsel

As we noted in last week's blog, on December 4, 2015, President Obama signed a transportation bill formally known as the “Fixing America’s Surface Transportation Act”, or the “FAST Act”. Now, one would not typically expect to find anything pertaining to financial privacy in a transportation bill. However, buried in the 490 page bill is a significant amendment to the Gramm-Leach-Bliley Act’s (“GLBA”) annual consumer privacy notice requirement. Specifically, the FAST Act amends the GLBA by adding an exemption to the requirement.

Section 503 of the GLBA, and Regulation P which implements the act, require that credit unions send annual privacy notices to their members. These notices must describe whether and how the credit union shares members’ nonpublic personal information. If the credit union discloses this information with nonaffiliated third parties, generally the credit union must notify members of their right to opt-out of the sharing.

The FAST Act’s new amendment provides an exception to the annual privacy notice requirement for any credit union that satisfies the following two conditions:

1. the credit union does not share nonpublic personal information with nonaffiliated third parties, except under certain exceptions enumerated in Regulation P, e.g., to service providers who perform services on behalf of the credit union pursuant to a joint agreement; or as necessary to administer or enforce a transaction requested or authorized by the member; and
2. the credit union has not changed its privacy policies and practices with respect to disclosing nonpublic personal information since it last provided a privacy notice to its members.

Under the amended law, if a credit union meets both of these conditions, it is no longer required to provide privacy notices to individual members on an annual basis. Alternatively, if a credit union cannot meet both of these conditions, it must continue to provide a privacy notice annually. In other words, annual privacy notices are required if and when a credit union makes changes to data sharing or begins sharing member data in a way that would trigger an opt out right. Keep in mind that these kinds of changes often require a revised privacy notice under section 1016.8      

If a credit union does not satisfy these conditions, and thus must provide annual privacy notices, it may post the privacy notice online rather than issue individual notices by mail pursuant to a final rule issued by the CFPB last fall.  Note, however, that this online notice alternative is available if certain conditions are met, such as not sharing data in ways that would trigger members’ opt-out rights. NAFCU previously published a Compliance Monitor article that discusses last year's changes, including when an annual privacy notice may be provided online. 

NAFCU has long advocated for regulatory relief in this area because our members have consistently communicated that their members find these disclosures more confusing than helpful. NAFCU hopes that these amendments will both reduce member confusion and lower credit unions’ administrative costs.

Note that the amendment to the GLBA became effective on December 4, 2015.  Moreover, the CFPB recently confirmed with NAFCU that it will treat the FAST Act’s amendment as controlling law.  Specifically, the bureau stated that it “is conveying to its supervision and enforcement staff that the law is effective immediately so that no financial institution is expected to comply with superseded regulatory requirements.” It is anticipated that the CFPB will amend Regulation P to reflect the new exception sometime in the coming year.

Programming Note & Happy New Year From the NAFCU Blog

NAFCU will be closed on December 31^st and January 1^st for the holidays, but we will be back to blogging on Monday, January 4^th. From everyone here, we wish you and yours a safe and happy holiday and a prosperous New Year!

FOM-Calling All Credit Unions, pt 3

Written by Alicia Nealon, Director of Regulatory Affairs

Happy Holidays! I hope the compliance community is still in the throes of family, friends and leftovers. But for those of you stealing a second away from the holiday cheer chaos, what better way to take a mental break than to chat about FOM. So with that, welcome back to the third installment of our series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s FOM proposal and highlight the key issues that we are looking for your feedback on. Last week, we discussed Multiple Common Bond Charters. Today, we are going to review the “Trade, Industry, or Profession common bond charter”, or more commonly referred to as a TIP charter.

NCUA is proposing to clarify its definition of a TIP to include employees of vendors, suppliers, and contractors that have a “strong dependency” relationship on and work directly with other entities within the same industry. The proposal explains that a credit union would need to demonstrate that an entity is:

1. “Strongly dependent” on the others within a TIP, and
2. Shares a narrow commonality.

The existence of a “strongly dependent” relationship would hinge on the likelihood of a significant economic impact, on either or both parties, if one party were unable to continue operations without doing business with the other party.

To illustrate how this amendment would play out if finalized, the NCUA Board offered federal credit unions that serve the Air Transportation industry as an example. In the preamble to the proposal, the NCUA Board explains that:

“an FCU that serves employees of companies within the airline industry that have a strong dependency relationship with airlines or airports, and whose employees work directly with providers of air freight transportation, courier services, air passenger services, in-flight food services, airport security, baggage handling, and commercial janitorial, maintenance and repair services. The premise of a strong relationship between these providers and their airport and airline customers is the likelihood of a significant economic impact, if not equally between them, if one were unable to continue in its operations without doing business with the other.”

What do the TIP charters think? Would this tweaks provide you all the relief that you need in this marketplace? Does your credit union anticipate utilizing this amendment? Are there any other changes to TIP charter requirements that NCUA should consider that have not been addressed in the proposal?

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-20, our Field of Membership Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your thoughts.

Annual Privacy Notice Update; Rates They Are A-Changin’ Part II: Advertising and Marketing Variable Rate Products; The Truth About Ollie; Programming Note & Happy Holidays from the NAFCU Blog

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

Annual Privacy Notice Update

When the relief measures regarding privacy notices were signed into law earlier this month as part of the transportation authorization bill, focus turned to the CFPB in hopes it would implement regulatory changes to the privacy notice requirements. Hearing the need for clarity from credit unions, NAFCU President and CEO Dan Berger wrote Director Cordray last week urging the Bureau to "act swiftly to implement these statutory changes and clarify the controlling law through a formal announcement or the promulgation of an interim final rule."​As you may have already read, the CFPB responded to NAFCU’s call for clarity yesterday and explained that it is conveying to its supervision and enforcement staff that no financial institution is expected to comply with the regulatory requirements which were superseded by that law. In the meantime, the CFPB is working with other regulators on a rulemaking to reconcile regulatory requirements with the law on the books. The full text of the response is available here. We will keep you updated as we hear more from the regulators on these changes.

Advertising and Marketing Variable Rate Products

 

Now that rates have budged for the first time in six years, we thought it might be good to refresh your memory regarding regulations specific to variable rate products. Last week, Benjamin Litchfield provided a summary of the disclosures requirements on variable rate products. Below is a quick outline of common regulations involved in advertising variable rate products.

Truth in Savings (TIS)

Section 707.8 of NCUA’s Truth in Savings regulations addresses advertising, and would apply to the advertisement of share or deposit accounts. If the advertisement states a rate of return, it must state the rate as an “annual percentage yield,” though if that phrase has been stated once, the term “APY” may be used thereafter. See 12 C.F.R. § 707.8(b). Under the regulation, the annual percentage yield (APY) is a trigger term, and if it is included in the advertisement, additional information must also be included, including whether the APY is variable. If the APY is variable, the advertisement must clearly and conspicuously state that the rate may change after the account is opened. See section 707.8(c)(1).

There are exemptions to this requirement for certain media outlets or methods of advertisement. If an advertisement is done over broadcast or electronic media (e.g. television or radio), outdoor media (e.g. billboards) or telephone response machines, then it is allowed to only use the shorter phrase “APY,” and the variable APY statement is not required. Also, if the advertisement is on a sign located inside a credit union or a share or deposit broker, or in a newsletter sent by the credit union, APY can be used throughout, and the variable statement if not required, though it must contain a statement advising members to contact an employee for further information about applicable fees and terms. See section 707.8(e).

Regulation Z

With regard to loans, Regulation Z contains multiple sections and subsections on advertising. More than one section may come into play, depending on the product advertised, the method of advertisement and the content of the advertisement.

When advertising variable rate, closed-end credit, if the APR is stated in the advertisement, it must also state that the APR is subject to increase. See 12 C.F.R. § 1026.24(d)(2)(iii). If the loan is also secured by a dwelling, the advertisement must state a simple rate based on a reasonably current index and margin, the period of time each rate will apply and an APR. See section 1026.24(f)(2)(i). In subsection 1026.24(i), there are strict requirements for certain practices, such as using the word “fixed” in connection with a variable rate transaction or advertising comparisons of payments and rates. As in Truth in Savings, there are disclosure exceptions and alternatives related to the advertising media or method ― consult the full regulation for details.

Regarding open-end credit, Regulation Z requires that when the periodic rate is stated in the advertisement, it should be stated as an annual percentage rate. If the rate is variable, that must be disclosed. See section 1026.16(b)(1)(ii). To disclose the APR for a variable rate plan, a credit union can use an insert showing the current rate or provide a rate as of a specified recent date. When advertising home equity plans, the advertisement must clearly and conspicuously state the maximum annual percentage rate (APR) that may be imposed. See section 1026.16(d)(1)(iii). Again, the regulations includes exceptions and alternatives for disclosures with certain methods of advertisements. For example, television and radio advertisements can avoid some disclosures by listing a toll free number to obtain additional information. See section 1026.16(e).

When advertising promotional rates, there are similar requirements for both home secured and non-home secured open-end credit plans. The advertisements must disclose that the rate will be variable and disclose a “reasonably current” APR that will apply after the promotional period ends. See subsections 1026.16(d)(2) and (g)(4). An APR is reasonably current if it is based on an index and margin current within 60 days before mailing to a physical address, or 30 days before e-mailing, posting on a website or printing in a generally available publication. See sections 1026.60, 1026.16 and Supplement I to Part 1026, comment 1026.16(d)-6. For non-home secured open end credit, if the rate or margin is determined by the consumer’s creditworthiness, the advertisement must disclose a list or range of rates that could apply. See section 1026.16(g)(4)(ii). There are slight differences between home secured and non-home secured disclosures, so be sure to check the correct subsection of 1026.16 when reviewing open-end credit advertisements.

If sending solicitations for credit cards, consult section 1026.60 which contains detailed requirements for solicitations, separated by the method of solicitation. For NAFCU members, the October 2015 Compliance Monitor contained an article entitled Opening Credits: Reminders For Advertising, Soliciting, Underwriting and Other Regulations Regarding Opening Credit Card Accounts which contains details regarding credit card solicitations and may be useful.

As always, if you are a NAFCU member struggling with finding the advertisement guidance you need, contact your NAFCU compliance team for assistance. We are here to help!

The Truth About Ollie

Earlier this month, I mentioned that I had ordered a genetic test to determine the breed of my dog Ollie. Guesses as to Ollie’s breed included Maltese, Lhasa Apso, Maltipoo, Maltichons, Havenese, Cotonese, Coton de Tulear, and a variety of other breeds I have never heard of before. Who knew the universe of tiny, white dogs is so big? In the end, no one nailed it exactly.

The results are in and Ollie is…

My husband and I have been referring to him as a Bichon-Maltijack, but a quick google search indicates that we may have made that up. If you are interested in reading the full report, it is here.

Programming Note & Happy Holidays From the NAFCU Blog

NAFCU will be closed on December 24^th and 25^th for the holidays, but we will be back to blogging on Monday, December 28^th. From everyone here, we wish you and yours a safe and happy holiday!

FOM-Calling All Credit Unions, pt2

Written by Alicia Nealon, Director of Regulatory Affairs

Happy Monday!! And, welcome back to the second installment of our series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s FOM proposal and highlight the key issues that we are looking for your feedback on. Last week, we discussed Community Charters. Today, we will review Multiple Common Bond Charters. Specifically, a look at the 5 proposed changes to various aspects of multiple common bond chartering.

To start off, below is an aggregated list of ways the proposal would modernize multiple common bond federal charters:

• Allow “Reasonable Proximity” through Online Access to Services.
• Permit the addition of persons who work regularly for an entity that is under contract to the sponsor of the Select Employee Group (SEG) listed in its charter, provided there is a “strong dependency relationship” with that sponsor.
• Permit inclusion of employees of an office/industrial park’s tenants under certain conditions.
• Streamline application process for demonstrating Stand-Alone Feasibility so that groups with between 3,000-5,000 members would need to submit a written statement indicating that conditions exist that result in the group being unable to form their own credit union.
• Allow a credit union’s common bond to include honorably discharged veterans of any branch of the United States Armed Forces listed in its charter, thereby continuing their eligibility for credit union membership beyond active duty.

For a comprehensive discussion of each of these amendments, be sure to check out NAFCU’s Regulatory Alert 15-EA-20. For today though, lets breakdown the permissibility of “reasonable proximity” through online services and the inclusion of SEG contractors and office/industrial park tenant employees.

“Reasonable Proximity” through Online Access to Services

As all the multiple common bond credit unions out there know, “reasonable proximity” is one factor considered when determining whether a group can be added to a charter. NCUA’s rules base “reasonable proximity” on the location of a “service facility” of the credit union. A “service facility” is currently defined as a credit union branch, a shared branch, a mobile branch that visits the same location on a weekly basis, or a credit union-owned electronic facility. In order to qualify as a “service facility,” a group’s members must be able to deposit funds, apply for a loan or obtain funds on approved loans.

Recognizing the advent of technology and its impact on commerce and consumer behavior, the proposal would amend the definition of a “service facility” to extend it to members of occupational select groups and pre-approved associational groups who have access to the credit union’s products and services through an “online internet channel,” such as a transactional website. The proposal explains that the “online internet channel” must be capable of accepting deposits for the member’s accounts, accepting loan applications from the member, or disbursing loan proceeds to the member.

However, it is important to note that the “service facility” definition change would only apply to the “reasonable proximity” requirement of a multiple common bond credit union and its select occupational and associational groups. The amended definition of “service facility” would not apply to the requirement that a credit union serving an underserved area “must establish and maintain an office or facility in [the underserved area].”

SEG Contractors

Under NCUA’s current rules, multiple common bond credit unions cannot add individuals who regularly work for an entity that is under contract to the sponsor of the SEG listed in its charter. Instead, the agency only presently allows a single occupational common bond to add these SEG contractors, so long as the contractor has a “strong dependency relationship” with that sponsor.

Acknowledging that there is no distinction between a single and multiple common bond credit unions in this area, the proposal would to extend to multiple occupational common bond credit unions the ability to add individuals who regularly work for an entity that is under contract to the sponsor of the SEG listed in its charter, so long as the contractor has a “strong dependency relationship” with that sponsor.

Office/Industrial Park Tenants

The proposal would permit a multiple common bond credit union to include as a SEG the employees of an office or industrial park tenant, such as the retail tenants of a shopping mall or business tenants of an office building.  This inclusion would be subject to two conditions:

1. Each tenant within the group must have fewer than 3,000 employees working at a facility within the park, and
2. Only those employees who work regularly at the park during their employer’s tenancy would be eligible for FCU membership.

The proposal notes that a credit union would not need to individual list each tenant in its charter as a group sponsor, but could instead list the office/industrial park itself. Through this streamlined approach, a multiple common bond credit union would not need to obtain letters from each tenant requesting credit union services. In the preamble, NCUA explains that a multiple common bond credit union could serve the tenant employees by obtaining a letter from an authorized representative of the park itself, such as a leasing agent.

What do the multiple common bond charters think? Would these tweaks provide you all the relief that you need in today’s marketplace? Does your credit union anticipate utilizing any of these amendments? As you saw in the bullets above, NCUA proposes to look at whether a group of more than 3,000, but less than 5,000, lacks the ability to establish a new single common bond credit union. Should NCUA consider a larger number than 5,000 members for this threshold? How many actual members does your credit union believe are needed to charter a viable new credit union?

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-20, our Field of Membership Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your thoughts.

Also, a holiday reminder to give yourself or someone else in your credit union the best gift this year- a chance to attend NAFCU’s 2016 Regulatory Compliance School. NAFCU is currently offering an early registration savings of $200—but it ends soon! Use code HOLIDAY by 1/8 to save. Check out the agenda.

Fighting Financial Institution Fraud

Written by Shari R. Pogach, Regulatory Paralegal

It’s been a busy, busy week here in Washington, DC, so here’s something a little lighter for you as we head into the last weekend before Christmas.

The Internal Revenue Service (IRS) puts out an annual report that highlights successful criminal investigation enforcement actions achieved during a fiscal year. As you would think, these investigations focus on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing. But here’s what caught my eye. In its fiscal year 2015 annual report there is a section on the IRS Illegal Source Financial Crimes Program, which includes all tax, tax-related, money laundering and currency violations.

Under this program, the IRS investigates criminal violations involving financial institution fraud.  And, apparently the “ability to bring income tax and money laundering charges augments prosecutors’ effectiveness in combating fraud committed against financial institutions, whether the violators work within or outside of the institution.” Two successful fraud investigations in fiscal year 2015 involved credit unions:

“Former Federal Credit Union Employee Sentenced for Bank Fraud and Filing False Tax Returns

On March 25, 2015, in Valdosta, Georgia, Kelly Yawn was sentenced to 41 months in prison and ordered to pay $628,539 in restitution to the fraud victims and $139,865 to the IRS. On Jan. 6, 2015, Yawn pleaded guilty to bank fraud and filing false tax returns. Between February 2008 and November 2011, while employed by a federal credit union Yawn accessed the credit union’s computer system to prevent electronic transactions (ACH) and written share drafts from posting to her account. Using that scheme, Yawn was able to misdirect for her own benefit more than 900 share drafts and more than 1,200 ACH transactions, totaling more than $499,000 that were paid from credit union funds. Yawn took additional actions to cover up the transactions so that they would not be discovered by the credit union or outside auditors by posting fraudulent deposits to credit union accounts. Yawn also filed federal income tax returns for 2008 through 2011 and failed to include the money she received from the scheme on her federal tax returns as income in those years.

Ohio Man Sentenced for Defrauding Credit Union

On Feb. 23, 2015, in Cleveland, Ohio, John Struna, of Concord Township, was sentenced to 43 months in prison and ordered to pay more than $2.3 million in restitution. Struna was also ordered to forfeit a restaurant he owned, a condominium and a 2014 Mazda. Struna previously pleaded guilty to conspiracy to commit bank fraud, bank fraud, making false statements and money laundering. Struna defrauded the Taupa Lithuanian Credit Union, based in Cleveland, out of $2.3 million. Credit union CEO Alex Spirikaitis, former teller Michael Ruksenas and Vytas Apanavicius were previously found guilty for their roles in conspiracies related to defrauding the credit union. Struna maintained both personal and corporate accounts at Taupa dating back to 1995. He began a conspiracy with Spirikaitis in 2002 and continued through 2013, during which time Spirikaitis caused Taupa to make approximately 46 fraudulent transfers into Struna’s accounts. In 2011, Struna requested and received $112,105 from Spirikaitis for the purchase of a condominium located in Fort Myers, Florida. At no time did Struna submit any credit applications or loan documents. The fraudulent transfers totaled approximately $2.3 million. From 2002 through 2013, Struna repaid only approximately $15,000 of the $2.3 million Spirikaitis transferred into his accounts.”

The IRS report is worth scanning as within the other case example descriptions are indicators of how criminals perpetrated their criminal activity through financial institutions even when not actively defrauding the institution itself.

Rates They Are A-Changin’ – Disclosure Requirements for Variable Rate Products

Written by Benjamin M. Litchfield, Regulatory Compliance Counsel

Greetings compliance fans! With the Federal Open Market Committee (FOMC) largely expected to announce an increase in the federal-funds rate today, many of you may be wondering what obligations credit unions have under federal law to inform members should rates on some variable-rate products increase. This blog post covers some of those questions by taking a look at NCUA’s Truth in Savings Rule and Regulation Z.

Before diving into these rules, keep in mind that share accounts and consumer credit plans are, at their base, contracts between a credit union and its membership that may be subject to various state and federal requirements outside of the scope of either Truth in Savings or Regulation Z. When contemplating a change in interest rates, the credit union’s agreement with the member will determine when the credit union can change rates on existing accounts.

Truth in Savings (TIS)

TIS rules regarding subsequent disclosures require 30 calendar days’ advance written notice for some changes to share accounts. However, section 707.5(a)(1) explicitly exempts variable-rate changes. Moreover, the rule only requires disclosure of changes that are adverse to the interests of the member. Therefore, an increase in the dividend rate and corresponding annual percentage yield would not be required to be disclosed in advance.

Regulation Z

For open-end consumer credit plans, such as credit cards, unsecured loans, and home equity plans, Regulation Z does not require credit unions to provide members with change-in-terms notices before rate increases under properly disclosed variable-rate plans. 12 C.F.R. § 1026.9(c)(2)(v)(C). For this exception to the advance written notice requirement to apply, the rate change must be based on a publicly available index that is not under the credit union’s control. Official Interpretations of Regulation Z state that an index is publicly available if the member can independently obtain and use it to verify the annual percentage rate applied to the account.

The commentary provides examples of certain circumstances where the index will be considered to be under a credit union’s control such as when the index is the credit union’s own prime rate or cost of funds. Another example is where the contract specifies a rate floor that does not permit the variable rate to decrease consistent with the index. It is worth noting, however, that the commentary does allow a rate ceiling that does not permit the variable rate to increase beyond a certain threshold. Finally, an index will be considered to be under a credit union’s control where the credit union has the authority to pick the index to be used.

The commentary also notes that the change must be as a result of a change in the index, and not a change in the margin used to determine the variable rate. For example, changing the margin from LIBOR + 2.50% to LIBOR + 3.00%, would not be considered an increase “due to the index” and therefore would require additional disclosures. For credit card accounts, changing the margin would also trigger the member’s right to reject the proposed changes.

For adjustable-rate mortgages (ARMs), Regulation Z requires credit unions to provide disclosures in connection with the adjustment of interest rates that result in corresponding adjustment to the payment. 12 C.F.R. § 1026.20(c). The disclosures should be provided to members at least 60 days but no longer than 120 days before the first payment at the adjusted level is due. For ARMs with uniformly scheduled rate adjustments, such as an adjustment every 60 days, credit unions must provide disclosures at least 25 days but no more than 120 days before the first payment at the adjusted level. This rule also applies to ARMs originated prior to January 10, 2015 in which the adjusted interest rate and payment are calculated based on a date that is less than 45 days prior to the adjustment date.

It is important to note that changes that occur within the first 210 days of the closing do not trigger advance notice requirements because homeowners will have received notices of the change at closing. 12 C.F.R. § 1026.20 (d). However, if the first adjustment to an ARM occurs within 60 days of consummation and the new interest rate disclosed at consummation was an estimate, the disclosures must be provided to members as soon as practicable but no less than 25 days before the first payment at the adjusted level is due.

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Cats and Christmas Trees: My wife and I recently put up our Christmas tree. While doing so, Hazel, the younger of our two cats decided that she wanted to help out. We adopted her from Meow Stories, a local cat rescue in Fredericksburg, VA and haven’t been happier. Her brother, Max, seems pleased to have a friend in his own haughty, cat-appropriate way.

 

 

FOM: Calling All Credit Unions

Written by Alicia Nealon, Director of Regulatory Affairs

In case you didn’t see, NCUA’s FOM proposal was published in Federal Register last week, and the comment deadline has been set for February 8, 2016. With that in mind, we are launching a series of posts where NAFCU’s Compliance Blog will break down different portions of the proposal and highlight the key issues that we are looking for your feedback on.  Today’s topic is Community Charters. Specifically, a look at the 7 proposed changes to various aspects of community chartering.

To start off, below is an aggregated list of ways the proposal would modernize community federal charters:

• Remove the “Core Area” Service requirement as an indicator of service to low-income persons and underserved areas in favor of annually reviewing the progress of business and marketing plans to assess service objectives within an original or expanded community.
• Tailor application of population cap to the portion of the area that the credit union seeks to serve when determining if the area exceeds the 2.5 million population limit, as opposed to the current practice of considering the whole statistical area.
• Allow Combined Statistical Area (CSAs) designated by the Office of Management and Budget (OMB) to count as a “well-defined, local community.” (Note: CSAs would still be subject to the 2.5 million population limit).
• Permit addition of adjacent areas to a community consisting of a Single Political Jurisdiction, Core Based Statistical Area (CBSA), CSA, or Rural District would be permitted after showing, based on subjective evidence, that the residents interact or share common interests.
• Recognize congressional districts as a Single Political Jurisdiction.
• Increase the population limit for a rural district from 250,000 to 1 million persons.
• Amend the definition of Underserved Areas to exclude non-depository institutions and non-community credit unions from the concentration of facilities ratio, as well explain that NCUA, when classifying an area as “underserved,” would consider two alternatives to the concentration of facilities ratio:
  1.  The Consumer Financial Protection Bureau’s (CFPB’s) list of “underserved counties,” or
  2. A metric of the credit union’s own choosing based on “data of the Board and the Federal banking agencies.”

For a comprehensive discussion of each of these amendments, be sure to check out NAFCU’s Regulatory Alert 15-EA-20. For today though, lets breakdown the application of the 2.5 million population cap and the addition of adjacent areas.

Population Limit of a Well-Defined Area 

Currently, NCUA applies the 2.5 million population cap to the whole population of the Core Based Statistical Area, regardless of whether the portion a credit union seeks to serve alone satisfies the population cap. To tailor the 2.5 million population limit strictly to the community a credit union seeks to serve, the proposal would modify the “statistical area” definition to specify that “a CBSA, Metropolitan Division, or well-defined portion of either one, must itself have a population of 2.5 million or fewer people.” This change will ensure that the portion to be served qualifies as a well-defined local community if it falls below the population limit, even if the CBSA’s population as a whole exceeds 2.5 million. The NCUA Board explains that a review of community charter requests revealed that many were denied because “the population of the whole [statistical area] exceeded the cap” even though the area requested was under the limit. The NCUA Board notes this trend as evidence that the current rule “is an unnecessarily broad application of the population cap, [which] produces unintended consequences.”

Adjacent Areas to a Well-Defined Local Community

The proposal would permit the addition of adjacent areas to a community consisting of a Single Political Jurisdiction, CBSA, CSA, or rural district, upon a showing by subjective evidence that residents on both sides of the perimeter interact or share common interests. However, the expanded community would be subject to the proposed population limits for community charters (2.5 million) and rural district charters (1 million).

The proposal would require a credit union seeking to add a bordering area to demonstrate to establish:

1. A “sufficient totality of indicia of interaction or common interests among residents of the expanded community” based on subjective evidence, and
2. An ability and commitment to serve the entire expanded community through the credit union’s business and marketing plan.

NCUA will base decisions on a number of factors with respect to the proposed service area in its entirety, including:

• Economic Interconnectedness
• Population Centers
• The existence of Quasi-Governmental Agencies
• Government Designations
• Shared Public Services/Facilities
• The presence of Colleges and Universities

What do the community charters think? Would these tweaks provide you all the relief that you need in this marketplace? How do you feel about the population caps—too high? too low? just right? Any other methodologies or data that your credit union thinks NCUA should consider for determining whether or not an area is “underserved”?

As you consider these questions, be sure to take a look at NAFCU’s Regulatory Alert 15-EA-20, our Field of Membership Issue Page, or reach out to me directly ([email protected], 703-842-2266) with your thoughts.  Also, you can view NAFCU's FOM webcast on demand.  For those that missed it, last Tuesday Matthew Biliouris, deputy director of the NCUA Office of Consumer Protection, along with other key agency staff, took webcast attendees through key parts of the proposed rule.  The webcast will remain available on demand for one year; registration is required, but there is no fee.

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Addressing Member Complaints the Right Way

Live Webcast: Thursday, December 17 | 2:00 p.m. – 3:30 p.m. EST

No matter how impeccably your credit union runs, you’re going to get complaints. Knowing how to effectively respond to a complaint is essential to long-term member happiness and proper credit union compliance. A solid complaint process can help keep your credit union free of any regulatory burdens that may result when a complaint remains unresolved. Through this webcast you’ll learn how to identify high-risk complaints and what actions they require. You’ll also be able to prepare your departments for various types of complaints and ensure the appropriate party within your credit union responds.

CFPB Cautions of Holiday Scams Targeting Elderly Individuals; NCUA Agenda; NAFCU’s Webcast on Skill-Building Fundamentals for Effective Risk Management

Written by Victoria Daka, Regulatory Compliance Counsel

On December 8, 2015, the Consumer Financial Protection Bureau (CFPB) issued a blog post titled, “Beware of Scams Targeting Older People during the Holidays.” As per the CFPB, while scammers target elderly individuals on a daily basis, scammers are expected to “ramp up their efforts to prey on people’s generosity during the holiday season.” As a result, the CFPB cautions about three major forms of scams towards elders: 1) the imposter or “grandparent scam”, 2) the Internal Revenue Service (IRS) scam, and 3) the false or imposter charity scam.

The most common form – the imposter or “grandparent” scam – generally involves a make-believe story where the scammer pretends to be an elderly individual’s family member and is in dire need of money to return home for the holidays. Additionally, under the guise of the IRS, scammers call elderly individuals and threaten them with being arrested for unpaid taxes or a fake debt. Furthermore, this time of year, elders are greeted with the increase in fictitious charities – which sound identical to the real ones. Scammers employing this option, request for year-end, tax-deductible holiday donations.

In response, the CFPB offers some general tips, including: verifying with family members the authenticity of the financial assistance request; verifying the charity solicitation claim by calling the charity directly; and inquiring with IRS directly if taxes are owed.

This blog post can be viewed in its entirety here.

NCUA Agenda

Yesterday, the National Credit Union Administration (NCUA) Board released its December 17, 2015 agenda. Below are the two items the Board will consider in the meeting:

1. Notice and Request for Comment, Regulatory Review in Accordance with the Economic Growth Regulatory Paperwork Reduction Act of 1996.
   
2. Final Rule, Part 745, Adding Share Insurance Coverage for Lawyers Trust Accounts and Other Similar Escrow Accounts.

 The Board agenda can be found here.

 Skill-Building Fundamentals for Effective Risk Management

Live Webcast: Wednesday, December 16 | 2:00 p.m. – 3:30 p.m. EST

Risk assessment is vital to the well-being of your credit union. You should be constantly identifying potential hazards involved in an activity or undertaking. And despite the temptation to do otherwise, each credit union must perform its own unique risk assessment – what may work for one credit union, might not be right for yours. This webcast will provide you with a baseline understanding of how to analyze risks, and perform risk assessments on all your products and services.

Military Lending Act – Some FAQs

Written by Brandy Bruyere, Director of Regulatory Compliance

As many of you know, back in July the Department of Defense (DoD) finalized changes to its rules under the Military Lending Act (MLA). We’ve already blogged a bit about the new rule (here and here), but as a refresher, the MLA rules will now apply to many consumer credit products (although not residential mortgages or vehicle purchase loans). Keep in mind that many of these rules have a compliance deadline of October 3, 2016 (for credit cards, the deadline is October 3, 2017). NAFCU receives a lot of questions on this topic as it is one of the more challenging deadlines in 2016 so I wanted to go over a couple of our frequently asked questions (FAQs) today.

The rule contains safe harbors for determining who is a "covered borrower," how will these work?

Under the MLA, servicemembers and certain dependents are "covered borrowers" and therefore covered loans made to these borrowers are subject to the 36% Military Annual Percentage Rate (MAPR) cap. These borrowers must also be provided with certain written and oral disclosures. Under the rule, there are two safe harbor options for determining who is a covered borrower - utilizing a DoD database, or relying on a consumer report from a consumer reporting agency (CRA). However, the accuracy of the database is in question, and consumer reports do not currently identify whether an individual is a servicemember or a servicemembers' dependent.

In discussing this issue with others in the financial services industry, it does seem that the various CRAs are willing to include whether an individual is a covered borrower for MLA purposes on consumer reports. The CRAs are apparently working with DoD to determine how this could be accomplished. DoD is also working on updating its MLA database for improved accuracy and to include dependent information including addressing possible privacy issues. In other words, while the identified safe harbor options are not up and running today, there are currently efforts underway to resolve the issue so stay tuned.

The rule prohibits a credit union from imposing “onerous legal notice provisions” or demanding “unreasonable notice from covered borrowers” as a condition for a legal action. What exactly is prohibited?

These provisions are in 32 C.F.R. 232.8(c) and (d), and unfortunately, DoD did not provide any guidance or explanatory information in the Preamble that would help interpret precisely what is prohibited. Mandatory arbitration clauses are clearly prohibited here, but these broad terms could make some clauses in loan agreements problematic. For example, it is not clear whether what is “onerous” or “unreasonable” and if measured subjectively, this could vary drastically from borrower to borrower, as what is onerous or unreasonable to a deployed servicemember may be different as compared to other covered borrowers. Credit unions may want to seek a legal opinion from their attorney on issues such as what kind of contractual provisions may post risk under the MLA, whether an objective or subjective standard may apply, and whether existing contracts may require some redrafting for use with covered borrowers.

Is it true that a loan agreement could be voided if not in compliance with the MLA?

32 C.F.R. 232.9 contains penalties and remedies for MLA violations which include not only possible criminal misdemeanor charges for willful violations and civil liability, but another penalty relates to voiding contracts. The rule specifically states “[a]ny credit agreement, promissory note, or other contract with a covered borrower that fails to comply with [the MLA] as implemented by this part or which contains one or more provisions prohibited under [the MLA] as implemented by this part is void from the inception of the contract.” This particular regulatory provision is not new (see the 2013 version of the penalties here) and is taken straight from the MLA itself. However, given the expanded scope of the MLA rules to most consumer credit products, the penalty now applies in new contexts.

Holiday Décor. Nolan “helped” us put up some holiday lights this past weekend, he enjoyed watching us struggle with lights!

 

 

CFPB Issues HMDA Resources; Blog Readers Meet Macie

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Last week, the Consumer Financial Protection Bureau issued a one hundred and nine-page small entity compliance guide to accompany its other compliance resources to help financial institutions understand their obligations under the new Home Mortgage Disclosure Act (HMDA) rules. 

The purpose of the small entity guide is to highlight information that credit unions might find helpful when implementing the new regulation.  Among the information includes two chapters that help explain the changes to the institutional and transactional coverage tests.  (NAFCU featured an article on this topic in the November Compliance Monitor).  The small entity guide also includes a discussion (with helpful examples) on the additional data that must be collected, recorded, and reported for covered loans and applications under the new rule.  Overall, the guide is a good starting point for determining what is necessary to be compliant under the new rule. 

In addition to the compliance guide, the CFPB posted other helpful resources.  Below are the links to the resources issued:

• Summary of reportable data
• Reporting “Not Applicable”
• HMDA Small Entity Compliance Guide
• HMDA key dates timeline
• HMDA executive summary
• Two HMDA Institutional coverage charts:

Entities covered for 2017

Entities covered for 2018

Unfortunately, the CFPB has yet to issue an updated version of Appendix A's instructions for completing the Loan Application Register, but has indicated that it will provide a "Filing Instruction Guide" for 2018's data collection requirements "in the future."

NAFCU is committed to helping credit unions comply with the new rule.  As the effective date nears, NAFCU will continue to provide resources and information to help credit unions comply with the new regulation. 

***

Introducing Macie!

My wife and I rescued Macie from Lucky Dog on Halloween.  She was a stray puppy picked up in June.  She was found with a host of doggie issues, but now has a clean bill of health. We believe she is a Border Collie and Pointer mix, but are not sure.  We have not done a DNA test, but we might consider it after Ollie’s results are announced.  If any compliance reader has a similar looking dog, please write me.

 Macie is very smart.  She has learned her name, sit, lay-down, fetch, and drop-it.

 

CFPB Issues Compliance Bulletin on Preauthorized Debit Transactions Under the Electronic Fund Transfer Act and Regulation E

Written by Shereefat Balogun, Regulatory Compliance Counsel

On November 23, the CFPB issued a compliance bulletin (Bulletin 2015-06) concerning the Electronic Fund Transfer Act (EFTA) and Regulation E requirements for obtaining a consumer’s authorization for preauthorized electronic fund transfers. In the bulletin, the CFPB observed that some entities are not fully complying with the requirements imposed by the EFTA and Regulation E. The bulletin primarily focuses on two areas: (i) obtaining the member’s authorization for preauthorized EFTs over the telephone; and (ii) providing a copy of the authorization to the member.

As you may know, Regulation E requires that preauthorized EFTs from a member’s account be authorized “only by a writing signed or similarly authenticated by the consumer.” Moreover, a copy of the authorization but be provided to the member. In the bulletin, the CFPB explains that a credit union may obtain a member’s authorization over the phone, provided that the requirements of the E-Sign Act are met. Specifically, the bulletin states that Regulation E may be satisfied if a member signs or similarly authenticates the authorization orally. For example, a member can authorize preauthorized EFTs by entering a code into their telephone keypad; or the credit union may record and retain the member’s oral authorization. In both instances, Regulation E is satisfied, provided the member intends to sign the record as required by the E-Sign Act. Note that the E-Sign Act prohibits the use of oral recordings as electronic records, where a law or regulation requires that information be provided to a consumer in writing. However, in the bulletin, the CFPB makes clear that the E-Sign Act’s restriction does not apply to Regulation E’s preauthorized EFT requirements because Regulation E does not specify that entities provide a writing to consumers when obtaining the authorization.

The bulletin also discusses Regulation E’s requirement for a credit union to provide a copy of an authorization for a preauthorized EFT to the member, noting that two of the most significant terms of an authorization are timing and the amount of the recurring transfers from the member’s account. The CFPB also provides an alternative to providing a copy of the authorization after its execution- a credit union can provide a confirmation form. For example, a credit union may provide a member with two copies of the authorization form, and ask the member to sign and return one and to retain the second copy.

Lastly, the CFPB makes clear that credit unions must obtain member authorizations before initiating preauthorized EFTs and provide a copy of that authorization to members. The CFPB encourages credit unions to provide a copy of the authorization to the member before the first preauthorized EFT is initiated.

 

We Listened So You Don’t Have To: NCUA Panel Discussion on Reaching Hispanic Members; Post-Turkey Day Regulator Round-Up; What Dog Is This?

Written by Elizabeth M. Young LaBerge, Regulatory Compliance Counsel

I hope everyone had a wonderful Thanksgiving. Last week felt like a short one to me, but it appears that NCUA and the CFPB managed to cram in a full weeks’ worth of regulatory news. Here’s a quick catch-up:

NCUA Panel Discussion on Reaching Hispanic Members

Yesterday afternoon, NCUA held a panel discussion, “Unique Challenges and Opportunities Servicing Hispanic Credit Union Members,” which emphasized the opportunities for credit unions that currently exist within the Hispanic population, and, importantly, practical, useful guidance and suggestions on what credit unions can do to engage potential Hispanic members.

The panel discussed common pitfalls in engaging potential Hispanic members, including the use of CIP policies or procedures which do not accommodate the documentation which can be provided by new immigrants. The panelists, including Sergio Osuna, a Supervisory Examiner for NCUA’s Region V Office, specifically referenced the matrícular consular, an identification card issued by a Mexican consulate, in place of U.S. government issued identification. The panel recommended that credit unions that wish to engage first-generation Hispanic immigrants, approximately half of which are either unbanked or underbanked, speak with the consulates of the relevant populations in their community to determine appropriate foreign government-issued identification.

The panelists also discussed underwriting loans for members who do not have social security numbers, marketing and engagement strategies, products to which Hispanic members respond, best practices for serving Hispanic members and field of membership considerations for adding Hispanic communities to a credit union’s charter. Any credit union which is considering outreach to Hispanic members of its community should consider giving the panel discussion a watch. It will be available via NCUA’s website in 4-5 weeks.

Post-Turkey Day Regulator Round-Up

CFPB Monthly Complaint Snapshot

On November 24, 2015, the CFPB released its monthly consumer complaint snapshot report. The November complaint report highlighted bank account and service complaints. It reported an increase in CFPB complaints pertaining to prepaid products ― though debt collection, credit reporting and mortgage complaints continued to be the most-complaint-about issues. The regional focus of the November report was on Connecticut and the Hartford metro area.

Adjustment of Dollar Thresholds in Regulations Z and M

On November 25, 2015, the CFPB announced that the thresholds for transaction exemptions under regulations Z and M will not be adjusted from the 2015 level of $54,600. The notice submitted to the Federal Register for Regulation Z is here, and the notice for Regulation M is here.

Adjustment of Threshold for Exemption from Appraisal Requirements

Also on November 25, 2015, the CFPB announced that the threshold amount for loans exempt loans from special appraisal requirements for higher-priced mortgage loans under 12 C.F.R. § 1026.35(c)(2)(ii) will also remain the same as it did for 2015: $25,500. The notice submitted to the Federal Register is here.

NCUA Debuts New Share Insurance Videos

On November 30, 2015, NCUA announced the release of three new videos directed at consumers to help them understand their insurance coverage on their deposits. The videos include a Share Insurance Coverage Overview, How to Use NCUA’s Share Insurance Estimator and Account Ownership Types.

A Christmas Surprise: What Dog Is This?

I have mentioned my dogs, Boomer and Ollie, in previous blog posts. Ollie is former stud dog rescued from a Pennsylvania puppy mill. Originally, the rescue organization advised us he was a one-year old bichon frise. When we arrived in Shamokin, Pennsylvania, we realized pretty quickly that was not the case. To date, every vet we’ve been to has had a different guess. We have finally buckled down and ordered a genetic test to determine his breed. Is little Ollie just a Maltese with a bad haircut? Or is he a Coton De Tulear, the royal dog of Madagascar? Only time and genetic testing will tell. Let me know if anyone has a guess ― the results should arrive around Christmas. Claiming to be right after the fact does not count!